UK's FSA to tackle operational risk

The FSA said whistle blowing is an important part of a firm’s operational risk procedures, and predicted that it will deter potential fraudsters at investment banks, insurers and brokers across the City of London.

The FSA has set up dedicated phone lines, postal and e-mail addresses for employees who suspect colleagues of financial wrongdoing, although there is no requirement for firms to distribute the contact information.

The UK financial watchdog will encourage staff to go to their senior management in the first instance, who should then inform the FSA. Those reporting fraud, or other malpractices, will not have to disclose their identity, although they will be encouraged to do so, said the FSA.

Whistle-blowers must “believe any allegations are substantially true” and are asked to come forward as soon as possible, rather than wait to collect evidence themselves. But the annonymity of whistle-blowers, should they choose to give details, can not be assured “since circumstances may be such that the disclosure of identity becomes unavoidable in law”, the FSA said.

“Whistle-blowing is a cost-effective risk management system, and so far the financial services industry has been enormously cooperative in its support of our approach,” said Carol Seargeant, managing director of the FSA’s regulatory processes and risk directorate.

Michael Smyth, a partner at law firm Clifford Chance and chairman of whistle-blowing lobbying group Public Concern at Work, said the scheme is valuable as an “early warning system” that could be used to avoid Enron-like financial mismanagement. “The question on my mind is whether Nick Leeson’s colleagues could have alerted regulators to his fraud earlier if this initiative had been in place,” Smyth added.

Although the scheme is only intended for financial firms with a presence in the UK, Smyth said he expects other European regulators to adopt similar approaches. “Regulation is about more than just picking up the pieces after the collapse. It’s about working to avoid disasters, and self regulation is central to a firm’s success,” he added.